ip suda bur final
TRANSCRIPT
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The Impact of Working Capital Management on Profitability:
A Case Study of Dabur Nepal Private Limited
Ipsu Khadka
Roll Number: 10450085
P.U. Registration Number: 2009-2-45-0026
A Project Report Submitted to
Ace Institute of Management
Submitted for the degree of
Bachelor of Business AdministrationBanking and Insurance (BBA-BI)
Kathmandu
November, 2012
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DECLARATION
This project entitled, The Impact of Working Capital Management on Profitability: A
Case Study of DaburNepal Private Limited which is submitted by me in partial
fulfillment of the requirement for the award of BBA-BI degree of Pokhara University
comprises only my original work and due acknowledgement have been made to materials
used in the report.
Signature:
Name of Student: Ipsu Khadka
Date:
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BONAFIDE CERTIFICATE
Certified that this project report
(The Impact of Working Capital Management on
Profi tabil ity: A Case Study of Dabur Nepal Pr ivate L imi ted)
is the bonafide work of
(I psu Khadka)
who carried out the summer project work under my supervision. This report is forwarded
for examination.
Prakash C. Bhattarai Vijay Anand Sharma Timilsina
Supervisor Program Director
Signature:
Name of the External Examiner:
Date:
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Acknowledgment
The successful accomplishment and preparation of the report on The Impact of Working
Capital Management on Profitability: A Case Study of Dabur Nepal Private Limited
would not have been possible without the support and cooperation from different
personals who provided their valuable comments and made other significant
contributions.
First of all, I would like to thank Pokhara University for providing us a wonderful
opportunity of conducting practical research to compliment our theoretical knowledge of
working capital management. I am equally thankful towards Ace Institute of
Management and its directors for facilitating us with an advanced computer lab and well-
equipped library. I am also very grateful to Mr. Niranjan Phuyal, our Seminar in Working
Capital Management course instructor, for entrusting me this substantial assignment and
extending his support and guidance in accomplishment of this report.
It would be injustice if I forget to acknowledge Dabur Nepal Private Limited. Without
their annual reports, I would never have been able to produce this report. Different books,
articles, journals and thesis have been consulted in preparation of this report. Thus, I
would like to thank all those authors and publishers. Lastly, I would like to take this
opportunity to thank all those who have directly or indirectly helped me in the
preparation of this research report.
Ipsu Khadka
BBA-BI VI A
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Abstract
In this paper, the relationship between profitability and working capital management is
investigated. For the study, the data of Dabur Nepal Private Limited is taken for the
period of 10 years from 2002-03 to 2011-12. The purpose of this paper is to establish a
relationship between profitability, the cash conversion cycle and its components for the
firm. The results of the research showed that there is a positive relationship between CCC
and profitability. It also showed that there is a positive, negative, negative relation
between ICP and profitability, PDP and profitability, and ARP and profitability
respectively. But all these relations were statistically insignificant. This study contributes
to the literature on the relationship between working capital management and
profitability.
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INTRODUCTION
Background of the study
During the course of our study of working capital management, we have been reviewing
articles on issues of working capital of the different industries and of different countries
helping us gain theoretical knowledge. But practically, I am mostly familiar with the
working capital management of the banking industry as I am a student of BBA-BI which
specializes in banking and insurance. This report will analyze the financial statements of
a manufacturing company i.e. Dabur Nepal Private Limited to understand the effects of
working capital management on profitability of the company, combining the theoretical
and practical knowledge of working capital that we have gained so far.
Working capital is known as life giving force for any business organization and its
management is considered among the most important function of corporate management.
The management of working capital is very essential as it directly affects the efficiency
of a firm. Working capital management refers to efficient utilization of funds which leads
to sufficient cash flow in order to meet its short-term debt obligations and operating
expenses (Investopedia). And cash conversion cycle CCC length is considered among the
fundamental ingredients of the working capital management (Appuhami, 2008; Keown et
al., 2003; and Bodie and Merton, 2000).
Cash conversion cycle is the time it takes for a firm to convert its inputs into cashflows.
Its components are inventory turnover period, account receivable period, and payable
deferral period. Cash conversion cycle is invariably useful as a comprehensive measure
because it effectively takes into account the time lag between the expenditure for the
acquisition or purchases of raw materials and the collections from the debtors on account
of the of sales of finished goods (Padachi, 2006). It has been argued that an effective and
efficient handling of short term assets and the corresponding payables is really a question
of life and death for the business enterprises and has much to do with the continued
existence of the firms. (Jose et al.,1996).
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This report is the observation and analysis of financial information of Dabur Nepal
Private Limited in order to establish the relationship of the components of working
capital management and their significance on the profitability of the company. This is a
case study which will help us derive conclusions of the whole manufacturing industry.
This report thus emphasizes the significant factors to take into study in order to maximize
profitability.
Company Profile: Dabur Nepal Private Limited
Dabur Nepal Private Limited was set up as an independent group company in 1992 which
is a subsidiary of Dabur India Limited. Dabur India Limited is a leading Indian consumer
goods company with interests in HairCare, Oral Care, Health Care, Skin Care, Home
CareandFoods. Dabur Nepal, set amidst the verdant greens and towering mountains of
the Himalayan of Nepal, has established a unique bond of technology and preservation.
The guiding force behind Dabur's growth and success has been the wealth of nature and
its limitless capacity to support life. With their overall vision of eco-sustenance and to
expand Dabur's resource and production base, Dabur Nepal Private Limited was set up.
With its successful operation, Dabur Nepal has set some of the highest business standards
with ultra-modern production facilities manufacturing premium products like Real fruit
juices Vatika Hair Care products, Dabur Hajmola and Dabur Honey both for the domestic
as well as international markets. Over the period of two decades, Dabur has established
itself as a strong nationwide brand, selling in over 20,000 retail outlets throughout Nepal.
Statement of the problem
The importance of working capital components on profitability has been established
theoretically, but these theories are not examined practically in Nepal. With the help of
this study, the extent of the impact of working capital components over profitability of a
firm if there is any is shown. It basically investigates the established theoreticalknowledge of working capital management in practical workings of manufacturing
companies of Nepal, taking Dabur Nepal Private Limited as the sole sample.
The questions that I would like to address in this study are:
- What are the relationships of the components of working capital management andprofitability of Dabur Nepal Pvt. Ltd.?
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- How does the cash conversion cycle relate to profitability of Dabur Nepal?- Do the working capital management practices of Dabur Nepal Pvt. Ltd. concur
with the established theories of working capital management?
Objectives of the study
The main object of this paper is to provide some empirical evidence on the relationship
between working capital management and profitability for manufacturing companies,
using Dabur Nepal Pvt. Ltd. as a case study for the period of 10 years from 2002/03 to
2011/12. Another important objective is to fulfill the requirement set by Pokhara
University for course completion of BBA-BI, sixth semester.
This objective is fulfilled with the help of following specific objectives:
To examine the effects of inventory turnover period on profitability of DaburNepal.
To examine the effects of payable deferral period on profitability of Dabur Nepal. To examine the effects of account receivable turnover period on profitability of
Dabur Nepal.
To examine the effects of overall cash conversion cycle on profitability of DaburNepal Private Limited.
Literature Review
The concept of working capital management of firms has been investigated time and
again by different researchers and academicians. It is such a tool which can define a
significant portion of a firms overall efficiency and profitability. The main used
independent variable defining WCM is the Cash Conversion Cycle (CCC). The idea of
CCC was pioneered by Richards and Laughlin (1980) as a powerful tool for measuring
how well a firm is employing its WCM practices. Gentry et al. (1990) concluded that a
firms market worth was invariably associated with the CCC. CCC basically shows how
long a firm takes to convert resource inputs into cash flows (Quayyum, 2012).
Authors such as Deloof (2003), Shin and Soenen (1998), Laziridis and Tryfonidis (2006),
Garcia-Teruel and Martinez-Solano (2007), Samiloglu and Demirgunes (2008),
Karaduman et al. (2011), Uyar (2009) and Wang (2002), whom did research in
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respectively Belgium, USA, Greece, Spain, Turkey, Turkey, Turkey and Japan and
Taiwan all found a negative relation between WCM, using the CCC, and firm
profitability. This negative relation is in line with the theoretical aspect of working capital
management which says shortening the cash conversion cycle so that your money is not
tied up in the production process any longer than necessary leads to higher profits. This
means that a firm will have higher profitability by having a WCM policy which results in
the lowest possible accounts receivables and inventories and the highest amount of
accounts payables.
Contradicting evidence is found by Gill et al. (2010), whom did research in the USA and
found a positive relation between CCC and a firms profitability. Such evidence is also
found by Sharma and Kumar (2011) in India. They found evidence of a positive relation,
which means that loosening the three parts of a firm working capital management leads to
higher profit. They argue that this is caused by the fact that India is an emerging market
and reputations of creditworthiness of firms are not fully developed and therefore many
companies loosen their working capital management. Another reason they state is that
only profitable firms can loosen their working capital and therefore its because these
firms are profitable, that they loosen their working capital management and not the other
way around. (Baveld, 2012)
In terms of related studies executed by researchers in terms of the components of cash
conversion cycle, the following table (Table 1) presented below summarizes the
individual relationships of account payable period, inventory turnover period and payable
deferral period with profitability of firms found by different researchers.
All these different studies give us the results and conclusions of those researches already
conducted on the same area for different countries and environment from different
aspects. What can be concluded from the previous research studies conducted is thatthough most studies found the existence of traditional, theoretical relationships between
the components of working capital management and profitability, there have been studies
resulting in contradictions to each of those relationships as well. On basis of these
researches done in different countries, the methodology of the research has been
formulated.
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Table 1: Effects of individual parts of the cash conversion cycle (Baveld, 2012)
Effect
Variable
Significant negative relation on a firms
profitability
Significant positive
relation on a firms
profitability
Number of days
Accounts
Receivables
Deloof (2003)
Laziridis and Tryfonidis (2006)
Gill et al. (2010)
Garcia-Teruel and Martinez-Solano (2007)
Samiloglu and Demirgunes (2008)
Karaduman et al. (2011)
Falope and Ajilore (2009)
Raheman and Nasr (2007)
Mathuva (2010)
Sharma and Kumar
(2011)
Number of days
Accounts
Payables
Deloof (2003)
Laziridis and Tryfonidis (2006)
Garcia-Teruel and Martinez-Solano (2007)
Karaduman et al. (2011)
Sharma and Kumar (2011)
Falope and Ajilore (2009)
Raheman and Nasr (2007)
Mathuva (2010)
Number of days
Accounts
Inventories
Deloof (2003)
Laziridis and Tryfonidis (2006)
Garcia-Teruel and Martinez-Solano (2007)
Samiloglu and Demirgunes (2008)
Karaduman et al. (2011)
Sharma and Kumar (2011)
Falope and Ajilore (2009)
Raheman and Nasr (2007)
Mathuva (2010)
Research Methodology
This report analyses the impact of working capital management on firms performance
with the study of Dabur Nepal Private Limited. To study the relationship between
working capital management and profitability, multiple regression has been chosen as the
primary method. Other techniques include descriptive analysis and correlation analysis of
the variables.
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Sample & Data Collection
Since this report is a case study of Dabur Nepal Private Limited, we can say that to attain
the abovementioned research objectives, this paper uses a sample of only 1
manufacturing company. The study uses secondary data where data was collected from
the companys financial statements over the period 2002/03-2011/12 i.e. 10 years.
Research model
This study undertakes the issue of identifying key variables that influence working capital
management of Dabur Nepal Pvt. Ltd. The choice of the variables is influenced by the
previous studies on working capital management.
Dependent variable:
- Profitability represented by ROTA (Return on Total Assets)Independent variables:
- Inventory conversion period (ICP)- Payable Deferral Period (PDP)- A/c receivable period (ARP)- Cash Conversion Cycle (CCC)
Control variables:
Various studies have utilized the control variables along with the main variables of
working capital in order to have an opposite analysis of working capital management on
the firms profitability (Deloof, 2003). The control variables chosen for this study are:
- Size of the firm (LNS)- Firm growth (FG)- Current ratio (CR)- Debt ratio (DR)
Therefore our regression model is:
Y = a+ b1X1 + b2 X2 + b3X3 + b4 X4 + b5 X5
Model 1: ROTA= a + b1ICP + b2 LNS + b3 FG + b4CR + b5 DR
Model 2: ROTA= a + b1PDP + b2 LNS + b3 FG + b4CR + b5 DR
Model 3: ROTA= a + b1ARP + b2 LNS + b3 FG + b4CR + b5 DR
Model 4: ROTA= a + b1CCC + b2 LNS + b3 FG + b4CR + b5 DR
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The various methods and formulae used in the models are given below in Table 2.
Table 2: Methods and Formulae used
Dependent variables:
-
ROTA= Net Profit/ Total AssetsIndependent variables:
- Inventory conversion period (ICP) = (Inventory/Cogs) * 365- Payable Deferral Period (PDP) = (A/c payable/ Cogs) * 365- A/c receivable period (ARP) = (Receivables/ Sales) * 365- Cash Conversion Cycle (CCC) = ICP + ARP - PDP
Control variables:
- Size of the company = Natural logarithm of sales (LNS)- Firm growth (GROW) = (SalestSalest-1)/ Salest-1- Current ratio (CR) = Current assets / Current liabilities- Debt ratio (DR) = Total debt/ Total assets
Note:
- For Net profit, NPAT was used- Total assets = Long term assets (viz. Fixed assets, Capital WIP, Investments)
+ Total Current assets
- For a/c payable, Creditors for goods was used- For a/c receivable, sundry debtors was used- For current liabilities, the provisions are excluded since they are not true
current liabilities.
- Total debt = Bank loan + Short term liabilities i.e. Total Current Liabilitiesand Provisions
Using Excel, the descriptive analysis, correlation analysis and regression analysis were
completed.
Limitations
During the course of this study, I faced several limitations.
Since only one sample company of Dabur Nepal is taken, the results may not beable to generalize the conditions of the entire manufacturing industry of Nepal.The study would be more meaningful if a larger sample was taken.
The study undertook only the past records of last ten years. The efforts, resources and expertise are all limited since the study had to be
conducted within a very limited time, along with efforts to accomplish several
other responsibilities of the researcher.
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DATA ANALYSIS AND FINDINGS
Descriptive analysis
This section contains the minimum, maximum, mean, and standard deviation of all
dependent, independent and control variables of the study.
Table 3: Descriptive statistics
ROTA I CP PDP ARP CCC LNS Growth CR DR
Mean 3.74% 116.62 39.68 34.21 111.14 10.56 0.10 2.35 0.63
Standard Deviation 2.28% 18.60 30.88 13.33 32.03 0.29 0.10 0.92 0.04
Minimum 0.08% 95.23 11.23 20.50 69.08 10.24 0.00 1.40 0.56
Maximum 6.88% 157.14 107.56 55.23 171.19 11.14 0.31 4.45 0.71
From the above table, we see that the average return on assets of Dabur Nepal for the last
10 years was only 3.74% with a standard deviation of 2.28%. The minimum value of
ROTA as a measure of profitability is 0.08% and the maximum value is 6.88%. It takes a
lot of days for Dabur Nepal to turn its inventory to sales on average around 116 days, the
minimum being 95 and maximum 157 days. In comparison to inventory conversion
period, it takes a lot less days for Dabur Nepal to turn its sales to cash i.e. ARP with an
average of 34 days. About the payment deferral period (PDP) i.e. time between receipt of
inventory and payment for it is an average of 40 days. Dabur Nepal has had a minimumtime of 11days and maximum of 108 days to pay its purchases on account. Overall, the
average cash cycle is 111.14 days. The firm has had 171 days as maximum time between
cash disbursement and cash collection and a minimum of 69 days.
The size of the firm as measured by LNS on average is 10.56 with only a slight deviation
of 0.29. The mean growth of the firm in terms of sales is 10% meaning the sales amount
of Dabur is in a steady increasing trend, with a SD of 10%. The average current ratio for
Dabur Nepal is 2.35. Usually, the average current ratio for manufacturing firms is around
2:1. Dabur is following this trend as well by keeping around twice as much current assets
as its current liabilities. Also, the mean debt ratio of Dabur Nepal is 0.63 i.e. 63%. Dabur
Nepal is an aggressive manufacturing company financing more assets with debt than with
equity. The maximum DR was 71% and even the minimum was high with 56%.
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Correlation analysis
Presented below are the correlation matrix and analysis of the relationships between the
variables of the study.
Table 4: Correlation matrix of the variables
ROTA ICP PDP ARP CCC LNS Growth CR DR
ROTA 1
ICP 0.1439 1
PDP -0.3929 -0.0491 1
ARP -0.7902 -0.2792 0.4493 1
CCC 0.1336 0.5121 -0.8059 -0.1793 1
LNS -0.5816 0.3935 0.2768 0.3537 0.1089 1
Growth -0.6598 0.1662 0.4542 0.4845 -0.1398 0.8577 1
CR 0.6990 -0.1185 -0.3499 -0.3913 0.1058 -0.5311 -0.6397 1
DR 0.1267 -0.1129 0.3517 0.0581 -0.3806 -0.0615 0.2271 0.2579 1
The table shows that there is a low positive correlation between inventory conversion
period (ICP) and profitability. This correlation indicates that in contrast to most theories,
any increase in inventory period leads to the increase in the profitability of Dabur Nepal.
Also contrasting theories, it is also shown that there is a negative correlation between
payable deferral period (PDP) and profitability.
Correlation analysis also indicates that there is a negative correlation between account
receivable collection period (ARP) and profitability. This means that if Dabur Nepal
reduces the time between sales and actual cash collection, it will lead to increased
profitability. This finding is in line with the theory of working capital management.
It is found that the relationship between cash conversion cycle and profitability is
positive, which also contradicts to most literature.
There is a negative correlation between LNS and profitability. This may occur if
managerial utility maximization replaces profit maximization as the firms objective
function (Alchian, 1965). Managerial utility maximization is a by-product of the
separation of ownership from management in modern corporations. This separation may
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increase with firm size, making large firms more vulnerable to managerial utility
maximization than smaller firms. Managerial utility maximization thus provides a
conceptual framework for a negative relationship between firm size and profitability. The
table also shows that there is a negative correlation between growth of sales and
profitability.
There is a positive correlation between liquidity (current ratio) and profitability and a low
positive correlation between debt ratio and profitability as well.
Regression analysis
In the regression models given below, the column "Coefficient" gives the least squares
estimates of bj while the p-value to each variable is used to derive the significance of the
relationship between the dependent and explanatory variables. AdjustedR2 is a
modification ofR2
that adjusts for the number of explanatory terms in a model. Standard
Error is the sample estimate of the standard deviation of the error u. The standard error
here refers to the estimated standard deviation of the error term u. It is not to be confused
with the standard error of y itself (from descriptive statistics) or with the standard errors
of the regression coefficients.
Table 5: Results of Model 1: ROTA= a + b1ICP + b2 LNS + b3 FG + b4CR + b5 DR
From the table, we see that the intercept (b0 or a) has a fixed positive effect of 0.2650 on
the dependent variable ROTA.
The coefficient of Inventory Conversion Period (ICP) is positive but statistically
insignificant (P-value > 0.05). It means that 1unit change in the ICP will result in 0.0004
Variables Coefficients Standard Error t Stat P-value
Intercept
ICP
LNS
Growth
CR
FL
0.265019937
0.000460948
-0.030676378
-0.024742621
0.011205177
0.02938995
0.736300655
0.000415303
0.064265727
0.23882128
0.012283152
0.261761654
0.359934
1.109907
-0.47734
-0.1036
0.91224
0.112278
0.737096
0.329266
0.658034
0.922471
0.41325
0.916012
R Square
Adjusted R SquareStandard Error
0.676847468
0.2729068030.019404766 F-statisticSignificance F 1.675611114248220.318608139756546
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unit change in the same direction in the profitability represented by ROTA. A positive
relationship between ROTA and ICP can be explained by the fact that firms which
maintain high inventory levels reduce the cost of possible interruptions in the production
process. This helps in preventing loss of business due to the scarcity of products and
reducing the cost of supplying the goods. (Mathuva, 2010). In doing so, firms are
protected against price fluctuation (Blinder and Maccini, 1991). This is especially
important in Nepal that is very prone to political risks such as strikes and bandhs.
Among the control variables, the size of the firm i.e. LNS and growth have negative
coefficient of -0.0307 and -0.0247 respectively. It indicates that as the firms size and
growth rate increases, its profitability tends to decrease. However, both of these
relationships are not statistically significant. Alternatively, among the control variables,
the current ratio and debt ratio have positive coefficients of 0.0112 and 0.0294
respectively. It indicates that as the current ratio and debt ratio increase, Dabur Nepals
profitability tends to increase as well. However, both of these relationships are not
significant as the P-values are greater than 0.05.
A simple summary of the above output is that the fitted line is
ROTA= 0.2650 + 0.0005 ICP0.0307 LNS0.0247 Growth + 0.0112 CR + 0.0294 DR
Adjusted R2 = 0.2729 means that 27.29% of the variation of yi.e. profitability (ROTA) is
explained by the regressors. The remaining variation is due to other factors not accounted
for in the model. Here, we can see that the model is not significant.
Table 6: Results of Model 2: ROTA= a + b1PDP + b2 LNS + b3 FG + b4CR + b5 DR
Coefficients Standard Error t Stat P-value
Intercept
PDP
LNS
Growth
CR
DR
-0.10527
-0.00011
0.005738
-0.12264
0.007328
0.129106
0.747923
0.000288
0.062181
0.247913
0.01412
0.303444
-0.14075
-0.3977
0.092282
-0.49468
0.518976
0.42547
0.894875
0.71116
0.930911
0.646762
0.631168
0.692386
R Square
Adjusted R Square
Standard Error
0.593403
0.085156
0.021766
F-statistic 1.167549
Significance F 0.453021
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From the table, we see that the intercept (b0 or a) has a fixed negative effect of 0.2650 on
the dependent variable ROTA. The coefficient of Payable Deferral Period (PDP) is
negative but statistically insignificant (P-value > 0.05). It means that 1unit change in the
PDP will result in -0.0001 unit change in the same direction in Y i.e. the profitability
represented by ROTA. Any decrease in the period of payable conversion has positive
effects on the profitability of Dabur Nepal. According to Deloof 2003, those companies
with low profitability tend to delay the payment of their liabilities. In other words, the
acceleration of debts payment is related to the increase in profitability which is consistent
with the findings of Farzinfar and Arani, 2012.
Among the control variables, the growth of the firm has negative coefficient of -0.12264.
It indicates that as the firms growth rate increases, its profitability tends to decrease.
However, this relationships is not statistically significant as the P-value is greater than
0.05. Alternatively, among the control variables, the current ratio and debt ratio have
positive coefficients of 0.0073 and 0.1291 respectively. It indicates that as the current
ratio and debt ratio increase, Dabur Nepals profitability tends to increase as well.
However, both of these relationships are not significant as the P-values are greater than
0.05.
Another relationship worth noting is the coefficient of LNS which is 0.0057. It was found
earlier in the correlation analysis that LNS and ROTA were negatively correlated. But in
this Model 2 regression, the relationship is positive. Since the independent variables are
correlated with each other as well, then such effects take place. In other words, if there
are several regressors and they are not independent then you can see the effect called
confounding.
A simple summary of the above output is that the fitted line is
ROTA= -0.10530.0001 PDP + 0.0057 LNS0.1226 Growth + 0.0073CR + 0.1291DR
Adjusted R2
= 0.0852 means that 8.52% of the variation of yi.e. profitability (ROTA) is
explained by the regressors of the model but we see that the model is statistically
insignificant.
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Table 7: Results of Model 3: ROTA= a + b1ARP + b2 LNS + b3 FG + b4CR + b5 DR
Coefficients Standard Error t Stat P-value
Intercept
ARP
LNSGrowth
CR
DR
0.145164
-0.001
-0.01129-0.01181
0.008442
0.042711
0.49417
0.000413
0.0409890.167745
0.008823
0.187612
0.293753
-2.41819
-0.27542-0.07038
0.956869
0.227654
0.783558
0.072905
0.7966330.947266
0.39282
0.831078
R Square 0.828315
Adjusted R Square 0.613708
Standard Error 0.014144
F-statistic
Significance F
3.859686
0.107547
From the table, we see that the intercept (b0 or a) has a fixed positive effect of 0.1452 on
the dependent variable ROTA. The coefficient of Account Receivable Period (ARP) is
negative and statistically insignificant (P-value > 0.05). It means that 1unit change in the
PDP will result in -0.001 unit change in the same direction in Y i.e. the profitability
represented by ROTA. Any decrease in the period of receivable conversion has positive
effects on the profitability of Dabur Nepal. In other words, the ROTA of the Dabur
increases if the accounts receivable conversion period is reduced. This shows the
importance of the management of working capital in Dabur. Although granting more
credit and longer deadline to customers may increase sales volume, but limiting the
period of receivables conversion improves the results of the performance of Dabur. This
finding is in line with most literature.
Among the control variables, the size of the firm i.e. LNS and growth have negative
coefficient of -0.0113 and -0.0118 respectively. It indicates that as the firms size and
growth rate increases, its profitability tends to decrease. However, both of these
relationships are not statistically significant. Alternatively, among the control variables,
the current ratio and debt ratio have positive coefficients of 0.0084 and 0.0427
respectively. It indicates that as the current ratio and debt ratio increase, Dabur Nepals
profitability tends to increase as well. However, both of these relationships are not
significant as the P-values are greater than 0.05.
A simple summary of the above output is that the fitted line is
ROTA= 0.14520.001 ARP0.0113 LNS0.0118 Growth + 0.0084 CR + 0.0427 DR
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Adjusted R2
= 0.6137 means that 61.37% of the variation of yi.e. profitability (ROTA) is
explained by the regressors of the model but we see that the model is statistically
insignificant.
Table 8: Results of Model 4: ROTA= a + b1CCC + b2 LNS + b3 FG + b4CR + b5 DR
Coefficients Standard Error t Stat P-value
Intercept
CCC
LNS
Growth
CR
DR
-0.059890482
7.14408E-05
0.001218016
-0.116203624
0.008302993
0.108368563
0.759918468
0.000265831
0.064744074
0.252750276
0.013880654
0.298026563
-0.07881
0.268746
0.018813
-0.45976
0.59817
0.36362
0.940968
0.801417
0.985891
0.66957
0.581948
0.734545
R Square
Adjusted R SquareStandard Error
0.584821561
0.0658485120.021994902
F-statistic
Significance F
1.126882
0.46697064
There is an insignificant and very low positive correlation between the return on assets
and cash conversion cycle. Based on this relation, an increase in CCC days would result
in increase in profitability of Dabur. It gives a strong indication to the firm manager/
owners that longer the CCC turnover in days, lesser capital will be deployed in current
assets and eventually there will be more capital investment leading towards a higher
profitability of the firm. (Attari and Raza, 2012). The rationale is also supported by the
concept of optimum liquidity position promulgated by Schilling (1996).
A simple summary of the above output is that the fitted line is
ROTA= -0.05990.00007CCC + 0.0012 LNS0.1162Growth + 0.0083CR + 0.1084DR
Adjusted R2
= 0.0658 means that 6.58% of the variation of profitability (ROTA) is
explained by the regressors of the model but we see that the model is statistically
insignificant.
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DISCUSSIONS
The findings of this study can be summarized as follows:
- The Inventory Conversion Period (ICP) of Dabur is positively related to theprofitability of Dabur Nepal.
- The Payable Deferral Period (PDP) of Dabur is negatively related to theprofitability of Dabur Nepal.
- The Accounts Receivable Period (ARP) of Dabur is negatively related to theprofitability of Dabur Nepal.
- The Cash Conversion Cycle (CCC) of Dabur is positively related to theprofitability of Dabur Nepal.
The positive relationship of ICP with ROTA indicates that higher inventory stocks will
increase profitability. This relationship can be explained by the fact that firms which
maintain high inventory levels reduce the cost of possible interruptions in the production
process, especially important in Nepal which is very prone to political risks such as
strikes and bandhs. Any decrease in the period of payable conversion has positive
effects on the profitability of Dabur Nepal. In other words, the acceleration of debts
payment is related to the increase in profitability which is consistent with the findings of
Farzinfar and Arani, 2012. Any decrease in the period of receivable conversion has
positive effects on the profitability of Dabur Nepal. . This means that if this company
makes its credit terms tighter, it will result in quick collection from debtors. As a result,
the firms profitability increases. Also, an increase in CCC days would result in increase
in profitability of Dabur. It gives a strong indication to the firm manager/ owners that
longer the CCC turnover in days, lesser capital will be deployed in current assets and
eventually there will be more capital investment leading towards a higher profitability of
the firm. (Attari and Raza, 2012).
We see that except for the relationships between ARP and profitability, all other
relationships contradict the theories of working capital management and profitability. It
suggests that Dabur Nepal could further increase its profits by taking a longer time to
convert its inputs to sales, shorter time to pay its creditors, and shorter time to collect
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from its debtors. Overall, if the cash conversion cycle is elongated, it will lead to
increased profits for Dabur Nepal.
On the other hand, these relationships have not proven to be statistically significant.
Neither the individual variables of the models are significant, nor are the models
themselves significant.The results of this study seems to indicate that there is no
convincing evidence that any of the independent variables i.e. the components of working
capital management have an effect on the dependent variable i.e. profitability. Said more
carefully, it means that the data are compatible with the dependent variable values not
being affected by any of the independent variables. All the regression models are
insignificant because either the independent variables are affecting each other and/or
because reality is more complex than perceived by the models.
Let us look at the trends of net profit after tax, sales, and assets of Dabur to get a more
clear perspective.
Chart 1: NPAT trends of Dabur Nepal Pvt. Ltd.
We can see that the net profit after tax for Dabur has been highly volatile over the period
of last ten years with no fixed trend. The NPAT have significantly decreased in the years
2008-09 and 2011-12. According to the companys annual report, in FY 2008-09, the
recession has crippled the world economy. As a result of this, the commodity prices
touched sky high with the price of crude oil crossing USD 140 per barrel. Similarly, the
cost of other inputs has also increased. Further, during the year, there was huge
appreciation in the value of USD, resulting in huge exchange loss to the Company. As a
0.00
500.00
1000.00
1500.00
2000.00
Rs.
(inl
acs)
NPAT
NPAT
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result of these factors, the Profit after Tax of Dabur has decreased significantly. Similarly
in 2011-12, due to Euro-zone crisis, there was huge appreciation in USD compared to
rupee, and hence Dabur Nepal incurred forex losses.
Let us now look at the total assets and sales trends of Dabur Nepal.
Chart 2: Sales and Total assets trend of Dabur Nepal Pvt. Ltd.
We can see above that the total assets and sales of Dabur have been in an increasing
trend.
The effects of these two components have the following effect on ROTA of Dabur:
Chart 3: Trends to ROTA of Dabur Nepal.
Because of the volatility of Daburs NPAT, the ROTA has been volatile as well despite
increasing asset trends.
As per the annual reports of Dabur, the world wide recessions and crisis are to be blamed
for such volatility. Further as mention in the annual reports of Dabur Nepal, the political
0.00
10000.00
20000.00
30000.00
40000.00
50000.00
60000.00
70000.00
80000.00
2002
-03
2003
-04
2004
-05
2005
-06
2006
-07
2007
-08
2008
-09
2009
-10
2010
-11
2011
-12
Rs.
(inl
acs)
Total assets
Sales
0
0.02
0.04
0.06
0.08
1 2 3 4 5 6 7 8 9 10
ROTA
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trends of Nepal are also to be accounted for such volatility. The ROTA is lowest the 7th
year i.e. 2008-2009 where the company had to undergo shut down of its operation for 1
month due to political crisis.
What can be suggested to Dabur Nepal is that it should implement ways to protect itself
from forex risks. Since it is a subsidiary of a multinational company, it is more prone
risks of the international markets along with the domestic risks.
Since the sample period taken for research is unordinary and not the usual case, the
results of the research has been unordinary as well. It can only be concluded that the
independent variables taken into account could not show their true effects on the
dependent variables due to the extraordinary external factors faced by the dependent
variable but not accounted for in the model.
Taking everything into consideration, a suggestion for further studies could be to look at
working capital management and profitability at normal times when the economy is
stable and growing, and at abnormal times like in crisis situations or recessions as
conducted by Baveld, 2012 in Impact of Working Capital Management on the
Profitability of Public Listed Firms in The Netherlands During the Financial Crisis.
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Annex
Calculation of necessary individual components:
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
NPAT 1521.86 1445.60 1116.68 775.50 852.70 705.30 23.65 1509.77 1858.98 414.8
Cogs 19654.45 20383.69 21849.55 22180.51 25771.58 28476.16 32275.02 31415.65 37219.51 49413.88
Sales 27961.79 28347.35 29634.41 31040.46 35181.33 39159.92 43519.23 44268.26 52335.45 68542.07
Inv. 5936.81 5318.12 7097.31 7062.56 6977.87 9878.98 8827.17 11381.11 16024.02 15062.3
TA 23350.03 21019.10 23182.47 25080.72 28447.79 32407.06 29730.43 28861.34 39345.30 44483.09
CA 14440.19 13246.84 14203.90 14919.06 18840.10 20518.94 17644.02 17553.83 26004.79 31020.12
CL 3241.81 5410.23 6549.33 7367.94 6952.06 12661.68 10903.84 5488.59 13902.31 22113.5
AP 1404.90 1720.22 1403.67 1915.97 3506.85 8391.20 992.85 1909.65 1539.73 10726.6
AR 2121.03 1722.47 1664.65 2145.73 4847.33 5365.60 6585.28 2714.87 4178.73 7406.83
TD 16551.03 13162.74 14582.61 15170.61 17750.69 20978.50 17795.09 16243.80 24899.76 29827.77
Where, Inv.= Inventories, TA= Total Assets, CA= Current Assets, CL= Current
Liabilities, AP= A/c payable, AR= A/c Receivable, TD= Total Debt
Calculation of necessary ratios:
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
ROA 0.0652 0.0688 0.0482 0.0309 0.0300 0.0218 0.0008 0.0523 0.0472 0.0093
ICP 110.2517 95.2288 118.5616 116.2207 98.8268 126.6261 99.8269 132.2304 157.1425 111.2592
PDP 26.0902 30.8031 23.4485 31.5290 49.6671 107.5562 11.2282 22.1871 15.0996 79.2336
ARP 27.6869 22.1785 20.5031 25.2313 50.2902 50.0114 55.2314 22.3846 29.1435 39.4428
CCC 111.8484 86.6042 115.6162 109.9230 99.4499 69.0814 143.8301 132.4279 171.1863 71.4684
LNS 10.2386 10.2523 10.2967 10.3430 10.4683 10.5754 10.6810 10.6980 10.8654 11.1352
FG - 0.0138 0.0454 0.0474 0.1334 0.1131 0.1113 0.0172 0.1822 0.3097
CR 4.4544 2.4485 2.1688 2.0249 2.7100 1.6206 1.6181 3.1982 1.8705 1.4028
FL 0.7088 0.6262 0.6290 0.6049 0.6240 0.6473 0.5985 0.5628 0.6329 0.6705